AIFMD To Drive Onshore Fund Growth
Tuesday, December 06, 2011

The Alternative Investment Fund Management Directive (AIFMD) will lead to some re-domiciliation of alternative investment funds to onshore locations in Europe, although offshore centres such as the Cayman Islands are expected to continue to be major domiciles for these funds, according to a new report.

The study, commissioned by the Association of the Luxembourg Fund Industry (ALFI), looks at which major offshore centres of fund domicile are currently used by alternative investment funds, looking separately at hedge funds, private equity funds and real estate funds. It also looks at potential future trends and how they may impact the choice of fund domicile in the future.

The report by Oliver Wyman concludes that some AIF managers, who would otherwise have decided to domicile offshore, will decide to domicile onshore due to regulatory reasons and investor demand, with European onshore funds likely to go to Luxembourg or Ireland. It is also expected that there will be greater co-domiciliation and clone fund structures between offshore and onshore jurisdictions under the directive.

The report also predicts that another major offshore funds centre could emerge in the Middle East or Asia because there is clear demand from both investors and investment managers for such a centre.

Marc Saluzzi, Chairman of ALFI, said: “Whilst it was widely believed within Europe that a consequence of the AIFMD and the related regulatory pressure exercised by the G20 countries, would be widespread re-domiciliation of funds into EU domiciles, and a fall in the number of offshore funds, this report demonstrates that the offshore landscape in the last two years has remained stable.”

The report highlights significant variations amongst asset classes in terms of domiciliation.

The Caymans are a clear frontrunner for hedge funds (43% of the market), receiving substantial business from both US and UK based managers because of their history and credibility with managers and investors.

Delaware, with 20% of the market, is mainly utilized by US-based hedge fund managers catering to a largely US client base.

The British Virgin Isles and Bermuda (10% each) are popular among both European and US hedge fund managers, because of both historical links to Europe as well as proximity to the US. Ireland (8%), Luxembourg (4%) and the Channel Islands (5%) are mainly popular among European hedge fund managers.

For Private Equity funds, Delaware is the main centre in the US and has the most developed private equity market, with 60% of worldwide private equity assets. Outside the US, 90% of private equity funds are domiciled onshore. Luxembourg currently has 9% of the Private Equity market worldwide.

Real Estate funds follow a similar pattern to private equity funds, because of the similar fund structures and fund life cycles, for example Delaware is the main centre with 47% of worldwide assets.

However, the Channel Islands with 25% of the market, are popular among UK real estate funds for historic reasons.

Luxembourg (11%) is the preferred domicile for European investors because of the range of vehicles available.

Saluzzi commented: “Whilst Europe has established UCITS as a global fund brand, we have a long way to go if we are to achieve the same in the alternative fund industry. We need to work hard to ensure that we have the right regulation and infrastructure to attract funds here. In Luxembourg we are also committed to help fund managers and institutional investors to leverage the development of regulated European alternative funds."

He concluded: "Luxembourg’s stated ambition is to be a global centre of excellence for the asset management industry, creating opportunities for investors, professionals and the community. We will make sure this also applies to the alternative investment fund industry by creating a global alternative brand in which institutional investors can have confidence.”